Royalty or revolution? A view from across the pond


first_imgSports betting By overturning PASPA, the US Supreme Court could transform sports betting nationwide. But, as so often when revolt is in the air, royalty stands in the way – in this case, the risk of high sports royalties on betting handle, which now threatens the revolution. And we should know – we’re British. By Paul LeylandThe United States got rid of its king nearly 250 years ago. Since then the former colonies have got a lot right, especially in economic terms. But one of the few areas where the Land of the Free lags behind the Old Country is in sports betting.In the UK, it is a thriving business worth more than $3.4bn in net revenue terms (excluding horseracing), all of it legal and regulated. By comparison, the legal and regulated element in the US is a desultory $300m or so, with the illegal, untaxed (and, by extension, unsafe) market worth about $2.5bn or more by our estimates.The clean repeal of PASPA could change all that, with a growing number of states prepared to act. We say “could” because a successful push for high, turnover-based sports-royalty fees (the integrity badge now seems to have been diluted) could put this eagerly awaited sports-betting revolution at risk.A bit of our own history is relevant here. Before 2001 the UK had a 9% turnover tax, including an element of racing levy (a sort of royalty for the sport of kings, in return for arranging itself for betting more completely than any other). Because British bookmakers were ungenerous fellows (some still are, though most have learned their lesson), this worked out as a revenue tax of about 30% (on gross margins of about 30%, including the cost of the tax).That’s not so dissimilar to the 15% to 20% tax on revenue that a 1% sports royalty on handle (“turnover” in the UK) implies on the 5% to 6% sports margins typical in Nevada and, we believe, among illegal sportsbooks. This is especially so because Britain’s 9% included government taxes as well as sports royalties, whereas a 15% to 20% revenue royalty fee is before state and federal governments even get a look-in.In 2001, Britain scrapped this duty regime in favour of a 15% revenue tax and a 10% horseracing levy, also on revenue. If we assume that customers have a certain amount they are willing to spend, and spend it regardless of whether it is on entertainment or tax as well, then the theoretical math(s) is very simple: 9% tax gets ‘recycled’ (spent over again on more bets) at a 21% net margin (30% minus 9%), therefore increasing turnover by 43% (9% divided by 21%).The theory was borne out almost exactly in practice, as William Hill plc advised investors in its 2002 Annual Results:“From the day of the introduction of the new tax there has been clear evidence of customers recycling the money saved on deductions into more and bigger bets. Turnover on fixed odds betting … in the retail channel was up 44% and gross win was up 1%”From a tax point of view this meant the Treasury and horseracing, instead of getting 30% of revenue, got about 22% (with about 60% of bets on horseracing at the time). So the government and sport were worse off, right? Well, in the short term, yes. But this was a calculated risk and one that payed off big time.That is because betting operators were now able to offer customers better value, since they didn’t have to price bets to cover a tax or charge the customer directly. In fact, a gross-profits tax does not have any direct impact on price; for better or worse, this allowed British bookmakers to offer roulette at a 97% payout, as well as low-margin in-play betting and highly competitive prices on the biggest football matches, horseracing festivals and sports tournaments. And customers loved it.In 2001, we estimate that the total UK sports-betting market, including horseracing, was worth about $2.2bn (on today’s exchange rates); it is now worth about $4.7bn. A 4.6% revenue CAGR might not be all that impressive but it hides a bigger story.In 2001, UK horseracing was worth about $1.3bn in betting revenue terms; it is still worth $1.3bn. Football and other betting has grown from about $440m to $3.4bn, a CAGR of 13%. In other words, the growth has come from sports betting because bookmakers have been able to price the product attractively.The theoretical tax yield crossed over within seven years and thereafter the UK government would have made substantially more tax out of the new regime than the old (if all revenue were captured onshore – but that’s another story).Revenue growth in sports betting since the tax change is not the most impressive aspect though. In 2001, there were about eight million Britons who frequented betting shops (nearly 20% of adults), though they were typically older blue-collar workers and their main interest was horseracing.About the same number of people now bet on sports across channels (about 70% online) but they aren’t from a (dying) socio-economic pigeonhole; they come from all walks of life, with only gender marking a demographic skew. Low taxes allowed more attractive pricing and products, which in turn drove a sports-betting revolution and has almost certainly increased the popularity of the underlying sports: just look at the spectacular success of Sky Betting and Gaming.The assumption from certain stakeholders in the run up to the PASPA decision seems to have been: “Let’s tax the bookmakers; plough the money back into the sport and therefore the sport will be richer.” This thinking is flawed on two levels, in our view, as the British experience demonstrates.First, just because a tax appears to be for a large amount doesn’t mean it will yield a large amount; in fact the opposite is often true, as Laffer explained to Reagan. Second, transferring value does not create it. If simply being able to bet on a sport to generate tax off it were a recipe for success, then US racing would be in rude health, leaving other sports for dust (or dirt). The real value comes from building customer engagement and this means providing a compelling product.The question is this: “Do US sports want to generate small sums of money by making small groups of people pay a lot for a niche service or do they want to build their fanbases to generate sustainable, growing returns?” We would hope that when seen in this light, there is a “right” answer.Another revolutionary slogan might be useful here: “No taxation without representation.” In other words, if stakeholders want a transfer of value, it should be //for// something: data has a value, picture rights have a value, ensuring integrity has a value, shaping the product to encourage engagement has, potentially, considerable value.Some or all of these can and should be paid for by bookmakers, either collectively or through commercial arrangements (which must offer advantage over those not paying). Something-for-something can build a vibrant, win-win model; something-for-nothing is likely to have the opposite effect.In the UK, there is no statutory underpin of sports rights within a specifically betting context outside horseracing. In that horseracing does more than any other major sport to accommodate betting, the need is both clearer and greater.But it is eminently logical that betting has a financial relationship with sport that recognises the value of the content and assists with integrity collectively, commercially or both. Here we went from one extreme to another. The US, by coming late to the party, has a golden opportunity to strike the right balance.By fixing high royalties (especially given that taxes need to come out on top), the US runs the risk of stifling the revolution and creating a stymied, inflexible and low-innovation sector that appeals only to a few. And to us, that sounds positively un-American.Paul Leyland of Regulus Partners was an equity analyst in the City for more than 10 years, among the first to be focused on the gambling sector. He moved into the industry as corporate development director for William Hill, advising on retail strategy, regulatory issues, the racing industry, supply chain management and M&A. Royalty or revolution? A view from across the pond Overturning PASPA could transform sports betting in the US but, as Paul Leyland explains, the risk of high sports royalties on betting handle now threatens the revolution Topics: Sports betting AddThis Sharing ButtonsShare to LinkedInLinkedInShare to FacebookFacebookShare to TwitterTwittercenter_img Subscribe to the iGaming newsletter 27th June 2018 | By Hannah Gannage-Stewart Tags: Online Gambling Email Addresslast_img

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